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Is the Gold Pullback Complete?

Andrew Walker

Gold has picked up some support in recent days, and investors are wondering if this is a good time to buy their favourite miners.

Let?s take a look at the current situation to see if gold stocks should be in your portfolio today.

Volatility

Gold bounced around for the first half of the year, but then staged a breakout rally through July and August, as investors headed for safe-haven assets amid concerns over North Korea. Traders also had a mood shift during the summer regarding their outlook for interest rate hikes in the United States.

Why are these things important?

Gold is perceived as a safe place to put cash when geopolitical or financial events threaten to upset the global markets.

In recent years, traders have pretty much ignored big events, including Brexit, Syria, and the flurry of terror attacks that have hit Europe. The ramp up of tension between North Korea and the United States managed to drive some fear into the market over the summer months, but that trade fizzled out in September.

On the interest rate side, the mood swings continue. Higher interest rates in the United States tend to be negative for gold, because they increase the opportunity cost of holding the non-yielding metal.

The U.S. Federal Reserve already raised rates twice this year, and initial expectations called for a third move before the end of 2017.

During the summer, weaker-than-expected economic data had the market thinking the Fed might stay on the sidelines until some time in 2018. That provided an additional boost to gold through the end of August.

In the past few weeks, however, the sentiment began to shift, and the market is now preparing for another 2017 rate hike, possibly in December. As a result, gold slipped from US$1,350 at the beginning of September to US$1,275 last week.

What?s causing the new support?

At the time of writing, gold is back up to US$1,295 per ounce, supported by a new wave of safe-haven demand. North Korea remains in the headlines, but the threat of a unilateral declaration of independence by Spain?s Catalonia region is also playing a role.

Why?

The situation has the potential to create a domino effect in Europe, and that has some investors concerned.

Should you buy?

Stronger-than-expected U.S. jobs numbers came out last week, spurring expectations that the U.S. Federal Reserve will indeed raise interest rates in December. This will likely put a lid on any potential rally triggered by geopolitical concerns.

That said, gold bulls might want to add a bit of their favourite miners to their portfolios on the recent downturn.

Some mining companies, such as Goldcorp Inc. (TSX:G)(NYSE:GG) are trading near their 12-month lows, even though gold is significantly above its December 2016 price of about US$1,130 per ounce.

In the case of Goldcorp, the company is working through a turnaround plan and expects to see its resource base and production grow 20% in the next five years, while all-in-sustaining costs are forecast to fall 20% over the same period.

If you think gold is headed higher in the medium term, Goldcorp might be an attractive contrarian pick right now.


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Fool contributor Andrew Walker owns shares of Goldcorp.


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Fool contributor Andrew Walker owns shares of Goldcorp.